Exemption limits, masala bonds on tax panel's radar

The tax simplification committee, chaired by Justice R V Easwar, is likely to touch upon restoration of standard deduction, reviewing of exemption limits and medical reimbursements for personal income tax in their report.

The 10-member panel is likely to submit its report to the finance minister this week or early next week. The report might also have suggestions on the incorporation of masala bonds in the Income Tax Act, to bring clarity on the capital gains tax on them. 

The recommendations are likely to be incorporated in the Union Budget, which Finance Minister Arun Jaitley is likely to present on February 1. The report might also focus on non-resident taxation, assessment procedure, property income and salaries, among others.

“Professionals are probably the most tax-compliant as salaries credit after deduction of taxes. But there is a case to look into the exemption limits and medical reimbursements. There have been requests from various salaried individuals to restore standard deduction. It does simplify the tax structure a lot,” said a source. 

“The focus will be to ensure simplicity, certainty and predictability in the income tax regime and cut litigation,” he added.

Former finance minister P Chidambaram did away with standard deduction for salaried personnel in 2004-05 on grounds that there was an equivalent increase in basic exemption limit and other deductions. 

Standard deduction was given as a lump sum benefit towards cost to income. But after the tax exemption ceiling on investment was raised to Rs 1 lakh, it was abolished. The standard deduction slab was Rs 30,000 for total income under Rs 5 lakh per annum and Rs 20,000 for income over Rs 5 lakh.

With the lump sum deduction, there was no need for a taxpayer to keep proofs of expenses such as bills, making it simpler for both the asseesse and the tax department.

The committee has held wide consultations with revenue officers and industry in Ahmedabad, Bengaluru and Mumbai.

The committee also deliberated on the non-resident taxation issue with respect to classification of income, which has led to a slew of litigations. 

“The non-resident tax issue, of Section 9 with respect to section 195, has been examined by the committee, which forms a major chunk of litigation,” said the source. 

The sections talk about the income deemed to accrue or arise in India from payments to a non-resident, be it salaries, technical fees, capital gains and royalties and the procedures. There appears to be issues with respect to classification.

Neeru Ahuja of Deloitte pointed out the issues pertain to whether income will be classified as business profit, or fees for technical services, or some other head, all of which have different rates. 

“Some disputes relate to classification, as to under which head does the income belong to. It is not clear whether it will accrue to India or not.  Besides in some cases income is taxed on a gross basis. Clarification is needed in these cases. The government should consider making the rates uniform,” she added.

The panel will likely recommend a clarification over tax treatment in case of masala bonds. 

The government issued a circular last year that interest income on rupee-denominated offshore bonds, or masala bonds, of Indian companies will attract a withholding tax of five per cent, but did not include it in the Finance Act, 2016. 

“Besides, the circular only talked about five per cent tax on interest and not about capital gains. There is only a circular and nothing in the law. Investors do not have a clarity on whether they will get capital gains exemption or not,” said Rajesh H Gandhi of Deloitte.

The Easwar committee was set up by Finance Minister Jaitley in October with a one-year term to study and identify the provisions and phrases in the Income Tax Act which have given rise to litigation on account of interpretative differences and that impact the ease of doing business. It has been tasked to suggest alternatives or modifications with a view to ensuring certainty and predictability in tax laws without substantially impacting the tax base or revenue collections.

A few key suggestions made by the panel in the first report including revision of threshold and rates on tax deduction at source formed part of the pervious Budget.

Issues under focus:

• Case for restoration standard deduction, re-look at exemption limits and medical reimbursement
• Tax treatment with respect to masala bonds — capital gains
• Clarity over non-resident taxation issues
• Transparency in assessments — cut discretionary power of tax officials
• Stringent deterrent provisions for TDS evasion